What Is Bar Chart? – Chart patterns reflect the sum of buying and selling, greed and fear among investors and traders. Many charts in this book are daily, with each bar representing one trading day, but the rules for understanding weekly, daily, or intraday charts are remarkably similar.
Remember this key principle: “Each price is a momentary consensus of value of all market participants expressed in action.” Based on it, each price bar provides several important pieces of information about the tug-of-war between bulls and bears (Figure 1).
The opening price of a daily bar tends to reflect the amateurs’ opinion of value. They read morning papers, find out what happened the day before, perhaps ask for a wife’s approval to buy or sell, and place their orders before driving to work. Amateurs are especially active early in the day and early in the week.
Traders who researched the relationship between opening and closing prices found that opening prices most often occur near the high or the low of the daily bar. Buying or selling by amateurs early in the day creates an emotional extreme from which prices tend to recoil later in the day.
In bull markets, prices often make their low for the week on Monday or Tuesday, when amateurs take profits from the previous week, then rally to a new high on Thursday or Friday. In bear markets, the high for the week is often set on Monday or Tuesday, with a new low toward the end of the week.
The closing prices of daily and weekly bars tend to reflect the actions of professional traders. They watch the markets throughout the day, respond to changes, and tend to dominate the last hour of trading. Many of them take profits at that time to avoid carrying trades overnight.
The Meaning of a Bar Chart
Opening prices are set by amateurs, whose orders accumulate overnight and hit the market in the morning. Closing prices are largely set by market professionals who trade throughout the day. You can see a reflection of their conflict in how often opening and closing prices occur at the opposite ends of price bars.
The high of each bar marks the maximum power of bulls during that bar. The low of each bar marks the maximum power of bears during that bar. Slippage tends to be less when you enter or exit positions during short bars.
Professionals as a group usually trade against the amateurs. They tend to buy lower openings, sell short higher openings, and unwind their positions as the day goes on. Traders need to pay attention to the relationship between opening and closing prices. If prices closed higher than they opened, then market professionals were probably more bullish than amateurs. If prices closed lower than they opened, then market professionals were probably more bearish than amateurs. It pays to trade with the professionals and against the amateurs. Candlestick charting is based, to a large extent, on the relationship between the opening and closing prices of each bar. If the close is higher, the candle is white, but if it is lower, the candle is black.
The high of each bar represents the maximum power of bulls during that bar. Bulls make money when prices go up. Their buying pushes prices higher, and every uptick adds to their profits. Finally, bulls reach a point where they cannot lift prices— not even by one more tick. 1 The high of a daily bar represents the maximum power of bulls during the day, while the high of a weekly bar marks the maximum power of bulls during the week.
The highest point of a bar represents the maximum power of bulls during that bar.
The low of each bar represents the maximum power of bears during that bar. Bears make money when prices decline. They keep selling short, their selling pushes prices lower, and every downtick adds to their profits. At some point they run out of either capital or enthusiasm, and prices stop falling. The low of a daily bar marks the maximum power of bears during that day, and the low of a weekly bar identifies the maximum power of bears during that week.
The low of each bar shows the maximum power of bears during that bar.
The closing price of each bar reveals the outcome of the battle between bulls and bears during that bar. If prices close near the high of the daily bar, it shows that bulls won the day’s battle. If prices close near the low of the day, it shows that bears won the day. Closing prices on the daily charts of futures are especially important because your account equity is “marked to market” each night.
The distance between the high and the low of any bar reflects the intensity of conflict between bulls and bears. An average bar marks a relatively cool market. A bar that’s only half as tall as average reveals a sleepy, disinterested market. A bar that’s two times taller than average shows a boiling market where bulls and bears battle all over the field.
Slippage (see the Introduction) tends to be less in quiet markets. It pays to enter trades during short or normal bars. Tall bars are good for taking profits. Trying to enter a position when the market is running is like jumping onto a moving train. It would be safer to wait for the next one.
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